While The White House crows of the falling unemployment rate (which everyone now knows is entirely useless as an indicator of anything), the rapid-drop in this indicator is a major headache for the Fed. While forward-guidance is crucial in replacing the "common knowledge" that the Fed remains easier-for-longer as bond-buying is tapered, despite it's dismissal by vice-chair Stan Fischer and BoE's Carney (and even an almost admission of its weakness by Bernanke), Yellen faces a market that is betting massively (actually in record size) that short-term rates will rise and Fed heads like Lacker shift to "more qualitative ways" of maintaining the punchbowl.
The concept of continuously doubling down in order to achieve financial and economic goals is now a respectable and established norm. Takahashi’s Wager of 1930s Japan shows that such a policy, while initially successful, can remove all sensible restraints. On the surface ‘Gamblernomics’, like the ‘Takahashi Wager’, appears successful - the equity market has risen substantially, the currency has fallen, and government bond yields remain low. So far, so good. How is the government gauging the success of this dice roll? They are looking for two percent inflation, a positive growth number, and have committed to two years of massive QE to achieve these goals. As time passes and these targets are not met, the policy makers will double down again, by which point interest payments and welfare spending are likely to comprise most of the budget.... Today’s adherents of ‘Gamblernomics’ are not only found in Tokyo, but also reign in all major financial capitals, each playing their own version of a similar wager. All believe that doubling down is a sober strategy given the sunk costs of lost growth. As a new generation of gamblers sit at the table, ghosts of gamblers past whisper - “Place your bets.”
While the stock market ramp on the disappointing ECB press conference can be, somewhat, explained and was to be expected by the central bank-addicted market's renewed focus that since the ECB did nothing, it is now the BOJ's turn to ramp up Quantitative Easing - a thesis which has been floating since November, and at one point resulted in 700 pips of "priced in" USDJPY upside - one group of investors is having a bad day: all those short Green Mountain Coffee shares, which as we pointed out last night exploded to 52 week highs in the aftermath of the Coke minority investment announcement. This is today's maximum pain trade.
Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:
1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.
2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.
Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.
Once again the smell of NAPALM is in the air
People Powered Privacy Savior ... Or Honey Trap Pushed By the Central Banks and TBTF?
Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly, for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.
XKCD published this cartoon in reference to ESPN and the like, but it’s even more applicable to CNBC and its ilk. Just to be clear, I’m not slamming these hosts and traders. I’m sure that they are overwhelmingly smart, honest people who believe that what they say are useful truths from their own perspectives. They are not hypocrites. But they are performers. And like any performer, there is a larger game being played with their words. The larger meaning of the statements made on CNBC has absolutely nothing to do with specific investment advice or news. CNBC really could not care less about the actual content of what is being said. The purpose of CNBC’s game is not to tell you WHAT to think, but HOW to think, that thinking about investing in terms of some sell-side analyst’s anodyne story about fundamentals or some trader’s breathless story about open option interest is smart or wise or what all the cool kids are doing. Why? Because CNBC can create inexpensive content essentially at will to fill this demand, allowing them to sell advertisements and take cable carriage fees.
"Many will remember Ben Bernanke for classic central bank stabilizing actions taken during the fall 2008 panic, including emergency loans to banks and swap lines to foreign central banks. But historians might also consider actions the Fed took before and after that panic...
Many argue that QE has not reduced unemployment, but has diminished the Fed’s independence and credibility, offsetting the effects of adopting a numerical inflation target. Now, only a year after the latest round of QE began, the Fed is struggling with how to unwind it, just as many had warned."
Last week brought two important pieces of news: one deceptive, the other fraudulent. The deceptive news was that the Fed, in its last Ben Bernanke moment, would stay the course. The fraudulent news was that US economy grew at a 3.2% annualized pace in the last quarter of 2013. We're still in the weakest recovery since the end of World War II. But since 1950, the composition of the US economy has changed so substantially that GDP 'growth' no longer means what it used to mean...
We find it truly extraordinary that anyone is surprised the financial system is under duress again.
There are two major concerns that everyone should be concerned about that we see taking this sell-off further and faster than anyone else expects...
In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity, Citi notes, had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets. So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, as Citi warns, our bias is that this is just the beginning.
Miserable? Feeling like you want to turn the corners of the smiley down so it reflects your current mood? Believe you would get the lead role in the Les Misérables?
Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.